Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the TrueBlue Fourth Quarter 2021 Earnings Call. [Operator Instructions]. Derrek Gafford, you may begin your conference.

Good afternoon, everyone, and thank you for joining today's call. I'm joined by our Chief Executive Officer, Patrick Beharelle. Before we begin, I want to remind everyone that today's call and slide presentation contain forward-looking statements, all of which are subject to risks and uncertainties, and we assume no obligation to update or revise any forward-looking statements. These risks and uncertainties, some of which are described in today's press release and in our SEC filings, could cause actual results to differ materially from those in our forward-looking statements. We use non-GAAP measures, when presenting our financial results. We encourage you to review the non-GAAP reconciliations in today's earnings release or at trueblue.com, under the Investor Relations section, for a complete understanding of these terms and their purpose. Any comparisons made today, are based on a comparison to the same period in the prior year, unless otherwise stated. Lastly, we will be providing a copy of our prepared remarks on our website at the conclusion of today's call and a full transcript and audio replay will also be available soon after the call. With that, I'll turn the call over to Patrick.

Thank you, Derrek, and welcome, everyone, for today's call. Before I discuss our fourth quarter results, I want to take a moment to reflect on the past year. 2021 was an extraordinary year across many levels. As the world continued to learn how to live in a pandemic, I'm very proud of the TrueBlue community for growing together to deliver solid results. The demand for our services has never been higher, as businesses turn to flexible solutions to solve their workforce challenges. Despite the ongoing challenges associated with COVID, including lower worker supply and supply chain disruptions, our ongoing commitment for our digital investments and numerous operating adjustments positioned us to emerge stronger from this downturn. Revenue grew 18% for the year and is on pace to recover to pre-pandemic levels, two years faster than the previous recession. New client wins at PeopleManagement and PeopleScout, throughout the year, and existing client recovery of PeopleReady and PeopleScout in the second half, drove this growth. Compared to where we were prior to the pandemic, we now find ourselves with a stronger, more agile and more efficient business model. 2022 will be my fourth year as CEO of TrueBlue, and I've never been more optimistic about the momentum we have in the business. Now let's turn to our fourth quarter results. I am pleased to announce our fourth quarter results surpassed pre-pandemic levels. Revenue was $622 million, an increase of 20%, compared to Q4 2020 and up 5% versus Q4 2019. PeopleReady's revenue growth accelerated throughout the quarter, driven by improved worker supply and strong performance within the retail sector, while same customer demand and new customer wins continue to produce impressive PeopleScout results. These factors produced adjusted EBITDA of $36 million, an increase of $14 million, compared to Q4 2020 and an…

Thank you, Patrick. Total revenue for Q4 2021 was $622 million, representing growth of 20%, compared to Q4 2020, and growth of 5%, compared to Q4 2019. This growth was driven by strong results at PeopleReady and PeopleScout. Strong overall demand, particularly in the retail sector, along with improvements in worker supply, drove the PeopleReady results. While PeopleScout benefited from strong client demand as well as turnover in the employee base of its clients, We posted net income of $20 million or $0.57 per share, an increase of $12 million, compared to Q4 2020, and an increase of $11 million, compared to Q4 2019. Revenue growth and gross margin expansion contributed to the net income growth in 2021. We delivered adjusted EBITDA of $36 million, an increase of $14 million, compared to Q4 2020, and an increase of $15 million, compared to Q4 2019. Adjusted EBITDA margin was up 160 basis points, compared to Q4 2020, and up 230 basis points, compared to Q4 2019, with growth in 2021, again driven by revenue growth and gross margin expansion. Gross margin for Q4 2021 of 26.8%, was up 350 basis points. Our staffing segments contributed 310 basis points of margin expansion, comprised of 110 basis points from lower workers' compensation costs, mainly due to favorable development of prior-period reserves. 70 basis points from favorable bill pay spreads, 70 basis points from increasing PeopleReady sales mix, which carries a higher margin than PeopleManagement, and 60 basis points from PeopleReady customer mix. Higher PeopleScout sales mix contributed the remaining 40 basis points of expansion. SG&A expense increased 33%, which was higher than our revenue growth of 20% due to the magnitude of the cost actions taken in Q4 last year. As a reminder, in Q4 2020, our cost management actions produced a decline…

[Operator Instructions]. Your first question today comes from the line of Jeff Silber with BMO Capital Markets.

I'm not sure if you talked about billing and wage rates in your prepared remarks. If you didn't, if you don't mind just discussing that, I'm just wondering, what the trends are? And if you're having any difficulty putting through some of the wage inflation we hear that's going on in the market?

Jeff, welcome today. It's Derrek here. I'll take that question for you. We continue to see high levels of pay rate inflation in our business. Pay rate inflation for the fourth quarter, for our PeopleReady business, pay rates were up 11.4%, which is a step-up from the 10.6% that we saw in the third quarter. So we continue to see high level of pay rate inflation. The pay rate inflation is actually a friend for us, as long as we're getting it passed through in our bill rates, which we are doing. In fact, in Q4, our bill rates went up 12.4%. So call that a positive bill pay spread of 90 basis points. And so although pay rates, still, are advancing quite well, high, we're getting that passed through. And this is actually one of our better quarters in our history, as far as positive bill pay spread, due to the supply and demand imbalance with the labor pools out there.

All right. That's great to hear. And just continuing on that theme, in terms of trying to find people. Are you doing anything different over the past few months or so to try to find labor supply, compared to before the pandemic?

Yes, Jeff, this is Patrick. I'll take that question. We're very much using an all-of-the-above approach. So when we think about finding people, the first thing is, you have to retain the people you've got. And so we've got programs we've put in place to help retain workers. We're using the JobStack app for in-app marketing to make folks aware of opportunities for jobs. And so what we've seen is, the average number of hours per worker increased over the last couple of quarters. The second thing we're doing is, we're doing what we call a rejuvenation program, where we look for former workers, folks that have been out of the market, that had worked for us previously. And we've got back-to-work campaigns that we've put in place to communicate with those folks and let them know there's opportunities. If they're ready to come back, then we're encouraging them to do that and reaching out to them. And then the third piece is around new workers. And so we've put in place some pretty effective grassroots recruiting campaigns. We've added centralized support that we didn't have, pre-pandemic. We've upped our incentives as well. And so we've seen a really nice trend, in terms of worker supply, that started to turn favorable in a more pronounced way, once the enhanced unemployment benefits ended in early September. And so we've seen a slow, steady, relentless improvement every month that's continued from September all the way through January. We saw a 13-point improvement in worker supply from September to December. And when you look at the revenue trends throughout the quarter, our revenue trends got stronger, as the quarter went along. So we're feeling really good about things. And by the way, there's still a long ways to go. If you look at our worker count, kind of, where we ended the quarter and compare that to pre-pandemic levels in the fourth quarter of '19. We've still got a lot more workers yet to come back. So we're doing some things different. We think they're pretty effective. But I think there's still some more supply yet to come back.

All right. Great. And if I could just sneak in one more. I really appreciate the amount of information you gave in your outlook. But as you say on the slide, is we are not providing customary revenue guidance, what do you need to see to start providing revenue guidance once again?

Jeff, it's Derrek here. I don't know if we'll start providing revenue guidance. One of the things that we've been doing here, is trying to give more color around the unique trends, specific things to call out for our investors to be aware of. But as far as giving traditional topline and bottom line guidance, we haven't been doing that for a while. I don't know if we necessarily need to. We've been enjoying spending more time talking about what's actually driving the business and where we're going with the business, as opposed to where we came in versus the guidance. As it pertains though to our first quarter guidance, we are giving historical information. And when we're providing that information to you though, it's not like we're arbitrarily grabbing it. I mean, we're looking at different periods, historical time periods. We're taking out anomalies, and we're putting that out there. So it's still, I think, very good information for investors. And if there's something that's different than the historical trend, like there was last quarter, we noted that PeopleReady was starting to accelerate, we'll provide that, too. So I think, we're really accomplishing the objective with giving everybody the direction they need, without giving specific top and bottom line guidance. Since we're on the topic though, I'll just go ahead and give the translation what that would be, if historical trends hold true in the first quarter, is 15% less than the fourth quarter that would pan out to revenue growth for the company of about 16% year-over-year.

Your next question comes from the line of Josh Vogel with Sidoti & Company.

Patrick and Derrek, congrats on a very impressive year. I -- just building off that last question. I'm sorry, if I missed it in your prepared remarks, but did you -- Derrek, did you give out trends that you saw across the 3 segments, for January?

No, we didn't give it out because we're not giving guidance. And so if we're not giving guidance, giving information about performance during the quarter, would be problematic. However, what I can say is, when we provide our historical averages that I just talked about, which would translate into year-over-year growth of 16% for the first quarter, we definitely were watching those trends in January. So if we've seen anything that was inconsistent in the trends for January, that would be in opposition to the historical trends that we've provided in the outlook, we would make note of something there to call that out for you.

That's helpful. Switching gears a little bit. And I don't know if this is easy to answer, but I'm just trying to think -- thinking about the leverage in the model and your commentary. Is there any way to ballpark and quantify how much lower the cost of delivery is today versus pre-pandemic, especially as you leverage the digital capabilities in JobStack? Is that something you can provide?

Well, I think there's a few different ways that we could talk about that. From an SG&A perspective, this quarter, our SG&A was 30 basis points lower than in Q4 of 2019. I think, some other ways that we can take a look at it, is what our productivity levels are, from a revenue perspective, per employee. The biggest area, where this makes the most difference, is in our PeopleReady business. And if we take a look at what revenue per employee is running in the fourth quarter, 2021 versus 2019, the revenue per employee is up 12%. So I think, we're making good progress on continuing to lower the service delivery costs. And as you know, part of it is not just about lowering the cost, it's also bringing the technology in to make it more scalable, meaning that we don't add as much cost as we normally would, as the revenue builds in the future. And on that Josh. And the one thing I'll note is -- another thing that we've called out is some investment -- more investment in the PeopleReady business, next year. We've -- our JobStack technology, we've got in our plans to bring that in-house. We want to keep the intellectual property of that in our hands, and we think we can innovate faster, doing so. And then with our front office technology at PeopleReady, I think applicant tracking systems, onboarding systems, ship management, things that are kind of done at the front end of the staffing process, that's on some very old proprietary technology, going back 20 years. That we will be moving off of our proprietary technology into some hub-based systems. And so I think, all of that brings even more scalability to the cost structure, going forward. And with more modern platforms in place on our front office technology for PeopleReady, which, by the way, JobStack sits on top of it and is somewhat dependent on, we think we can really increase the agility of the innovation in that business to continue to digitalize the business and make the cost structure not only more scalable but our service offering more appealing to customers.

That's really helpful. I want to ask a question about the market pilot. Obviously, seeing a lot of success there with the delivery model. And actually, as I'm saying this, I'm seeing the footnotes now that you're looking to expand the pilots this year and full implementation expected for 2022. I'm just curious, what percent, when we think about the branch network, is -- do you currently have pilots? And what's -- as you expand throughout 2020, how big do you expect this to be?

Yes, Josh, this is Patrick. Thanks for that question. Just to remind everyone, kind of, what we're doing with the market centers. The first thing is, we've expanded hours from 60 hours to 85. And a key part of the strategy is, we're adding more client-facing resources and fewer non-client-facing resources. And so we're going to take those savings and bank some of that, and we shared some of the numbers in the prepared commentary. And we're also providing more consistent delivery and training coverage and things of that sort. From a metrics perspective, we're looking at financial and nonfinancial metrics of things like revenue growth and pay bill spreads on the financial side and the number of associates we're able to recruit, the number of clients we're able to sign on and retain average hours per associate, things of that sort. And we're really pleased with the progress that we're making. And there's been steady progress. We didn't come out of the gates, particularly strong in the first couple of quarters we ran these, but we're building some momentum. So expanded the pilots in Q4, as an example, to include rural market pilots. We've got 5 of our branches in Downstate Illinois, Peoria, Bloomington-Normal, Decatur, Champagne, those types of locations. And so we've started piloting those, and those are off to a good start. So we're going to be making some decisions over the next couple of months and finalizing rollout plans and details. And if all goes according to plan, we'll be moving from a pilot phase to a rollout phase in Q3 and would be fully rolled out in the first half of 2023. In terms of the number of branches, roughly half or so are within 50 miles of a major metro and roughly half are in secondary cities. And so depending on how the pilots play out, related to the rural market locations, that will really impact how many branches we ultimately move into, kind of, a service center model. But the headlines are, we're really pleased with the progress, and we're going to be making some decisions and likely go to a rollout phase in Q3.

Those are great insights. And just last one, just trying to bridge. So on the gross margin -- by back on the envelope math coming out with that $7 million added to gross profit from the workers' comp adjustment in the quarter, about $0.15, $0.16 of EPS. So what is workers' comp add to the full year? I really want to get a handle on what type of -- given your guidance, what type of headwind is built in or tailwind won't be there in 2022, and it's kind of masking all the leverage you're seeing in the model, with digitization and delivery and the likes?

Yes. I'm glad you asked that question, Josh, because you'll see in our outlook for Q1, we're expecting gross margins to go up. But for the full year, we're expecting gross margins to be down, call it, maybe 40 basis points. So here's what's going on, is that in 2021, we had a very good workers' compensation year. Many of those -- when I say good, what's being driven by is favorable development on prior-year clames. So one of the advantages that we have and being largely self-insured and a good balance sheet, is that we can go and put capital towards closing claims, particularly high-dollar claims in jurisdictions that are not very employer-friendly, and we've had a lot of success doing that. And so what -- what has happened this year, is our workers' compensation expense, as a percentage of revenue, is about 1 percentage point lower, nearly, than it was in 2020. Well, the 2020 rate really is a more sustainable run rate for us. So we will be expecting workers' compensation to go back up, not because of any degradation in the overall cost structure, on a run rate basis, but just less favorable development on prior year reserves. So we're looking at, call it, nearly 1 point in headwind on gross margin, from workers' compensation in 2022 and favorable bill pay spreads helping offset that to bring it down to about 40 basis points. I should also mention, though, when we're talking about gross margin while we're on the topic, you should expect gross margin, 25% to 27% in -- 25.5% to 25.7% in Q1, 2 and 3, and then about a 50 basis point drop in Q4. Now what that will do is, that will be a more pronounced gross margin headwind in Q4 2022 because workers' compensation, we got some very favorable development in Q4 of '21. And that brought workers' compensation down to nearly 1% of revenue in Q4.

Your next question comes from the line of John Healy with Northcoast Research.

I wanted to stick with the gross margin question on -- a little bit more. Just one, we look at the performance, and you guys always put the slide in there. I think, it's Slide 4 or 5, just bridging the gross margin performance. That performance in staffing continues to really surprised me to the upside and the bill and pay rate combination there. So how are you able to do that in such a tight labor market? Is there a mixing of clients that's going on? Is there less competition in the verticals that you guys are competing in? So I would just love to know how you're pulling off the staffing gross margins continuing, just on a core basis, move higher, despite the wage pressures that everyone is talking about. And then when you just look out like later '23 and '24, like what's the right level of gross margin for the company? I know, you guys have evolved and changed a lot over the last couple of years, and it seems like 1 year, there's something that's helping or 1 year that's hurting, from a segment standpoint. So that longer-term range of gross margin, is it higher than this 25.5%? Or do we start to, kind of, move to a lower level or just kind of level longer-term viewpoint of the mix and the moving factors there?

Well, let me try to take both of those. So if we're talking about the fourth quarter, the staffing gross margins were up very sizably. So we had 310 basis points of our 350 basis points of gross margin expansion that came from the staffing side. Now we talked about some of that being lower workers' compensation that won't necessarily carry. That was about 110 basis points. Better bill pay spreads, and we'll queue that to the fundamental gross margin expansion, is 70 basis points. Revenue mix was helpful at PeopleReady that added about 70 basis points, what I'm reflecting there is PeopleReady growing faster than PeopleManagement, and PeopleReady is a higher gross margin. And then we had a drop, year-over-year, in our energy-related business, which is a lower gross margin, which ends up benefiting us. If we come back to the bill pay spreads, the 70 basis points, which I think is the fundamental part of your question, now that's something that we're working very, very hard on. And it is a short demand or short supply market. But if we can't get bill pay spread, when there is supply and demand imbalance -- I don't know when we can get them, and so that's how we talk about it here at the company, this is really the time. And so we've got everyone ultra-focused on making sure that we are getting paid the right wage for the right bill rates in [Technical Difficulty]. And It will be, going forward. I do think, we have more opportunities to have faster growth in our PeopleReady business and our PeopleScout business, which carry higher gross margins. You can see that's also where we are investing largely the technology dollars. So I do think, there's opportunity for that growth margin to go higher. And as a result of those two business units, having a higher mix of the business in the future than they do today.

I got one other thing I'd add to that, just over time, you kind of look out a couple of years into the future, using data science and machine learning to identify associates that we can match to jobs, that have the highest probability of showing up and successfully completing the job, which, of course, is how we get paid. We think there's some opportunities, over time, to take our business to the next level with leveraging more data science and machine learning. And so we're incorporating that, going forward, in our JobStack tool. And my sense is, there's going to be some opportunities, long term, not just TrueBlue, but within the industry to get a lot more efficient in how we engage workers and pick the highest-probability workers for showing up and completing the assignments, which will help our margins because there will be fewer call-offs and fewer disappointing customers and things of that sort.

And then just on the capital allocation. I know you guys are doing a fair amount on the tech side of things. But just, kind of, the buyback activity in the quarter, I think you got to $17 million. Is that something that you guys are prioritizing more and will continue to be active on, this year? Or how do you think about the kind of returning capital and given what the business is doing, maybe being more aggressive there?

Yes. It's an area that we plan to be more active in, going forward, John. So for us, getting past the third quarter of this year was really important for us. We had approximately $60 million of payroll taxes that we had deferred under the CARES Act, out of 2020, that we need to repay. And then with our revenue growth, we had a sizable amount of capital going into stocking back up our accounts receivable base. Now, with those two behind us and the business producing strong cash flows, we're in a position where we will be allocating more capital back to shareholders and have more excess capital to do that. So yes, we purchased back $17 million in Q4. We filed a 10b5-1 plan in Q4 to purchase those. We bought $13 million more, back in January, for a total of $30 million. We authorized, our Board did, $100 million of additional share repurchase. So that's something that we plan to complete over the next 3 years. So yes, we've been a little absent on the share repurchases in 2020 hit, first half of 2021, making sure the balance sheet is intact, but we believe we're past that now. So you should plan on seeing more from us in that area, going forward.

Your next question comes from the line of Mark Marcon with Baird.

Just wondering, with regards to the consolidation of the offices and the service centers, can you talk a little bit more about the results that you ended up seeing out of the pilot programs in Q4? Obviously, they were good and encouraging. Otherwise, you wouldn't be doing what you're doing. But I'm wondering if you can quantify them, like how much -- on an indexed basis, how much better did the Dallas and Chicago do, relative to matched markets?

Thanks, Mark. This is Patrick. I appreciate the question. Unfortunately, I'm not going to give you a detailed answer on this one. We're keeping that to ourselves. I'd just leave it at that we're very encouraged and that's why we decided to expand our pilots and in addition to including the rural markets. So -- but we're not going to be giving out those details.

Okay. In terms of the retail client that really picked up in Q4, what's your anticipation with regards to the success that they ended up seeing from utilizing you? To what extent do you think that's repeatable?

Yes. So this was a large retailer that has a name everyone would know, and we were in their retail outlets, doing things like cleaning their stores, cleaning out their fitting rooms. It was a very successful project, from the client's perspective and from our perspective. So it was -- to a large degree, it was a seasonal project, though, Mark. So we would expect that the good service that we delivered, will continue to do business with them and probably have some spikes again, next year, in Q4 -- or sorry, later this year in Q4 like we did it last year. So I expect something similar in Q4, later this year.

Okay. Great. And then, can you comment a little bit, in terms of what sort of puts and takes you ended up seeing from absenteeism during the quarter?

Yes, I could take that one. We definitely saw higher instances of absenteeism, particularly in the late November, December time frame. It was about a 5-point drag in the PeopleManagement business through the quarter and sort of peaked at about a 10-point drag at -- in December. We've seen that ease off quite a bit, though, recently. Obviously, it was driven by folks calling in sick or concerns they might be sick with Omicron, and it's a very manageable situation. But it definitely -- we saw a spike in that late November, December time frame, and it's been easing off since. So a very manageable situation.

Great. And to what extent do you think it ended up helping, in terms of orders, in terms of filling in for late-notice absenteeism -- absentees in your client base?

Well, it depends on what business we're talking about. If we're talking about PeopleManagement, it was clearly a drag because we have exclusivity at those sites. And so if people are calling off at the last minute, and we're not able to refill those right away, that's just revenue that's lost. On the PeopleReady side, sort of a mixed bag, where we were having a lot -- obviously, clients were having lots of folks calling off. And so they -- so there was a spike in demand and a challenge, from a supply perspective. And we don't really have a good way of measuring it in the PeopleReady side. So it's hard to put a specific number in PeopleReady like we can in PeopleManagement. One other thing that's, I think, relevant, that wasn't part of your question, but a similar type of issue, which is around the supply chain challenges. We're definitely seeing -- we saw headwinds in Q4, pretty widespread across geographies and industries, particularly in our manufacturing clients. And Derrek had mentioned in our alternative energy, that was a smaller part of the business in Q4. We saw a lot of solar installations that were delayed, out of Q3 and Q4, in 2021 into Q1 and Q2 of 2022. Lots of stops and starts, where clients will order a couple of hundred people, will go out and recruit those folks and get them started, and then there'll be a supply chain disruption, where they won't have all of the materials that they need. And so they'll work for 2 days, and then we have to call them off. On the bright side, clients are telling us that they believe this is more of a first-half 2022 type of issue and expect things to more sort themselves out in the back half of '22, related to the supply chain. So that was a much bigger issue for us than the absenteeism issue.

Appreciate the color. And then on PeopleScout, can you talk a little bit about the RFPs that you were involved in, that you ended up seeing over the fourth quarter. Obviously, over the course of the last year, you've seen quite a few. What are you seeing, in terms of the pipeline? And what percentage are you winning in recent months?

Well, PeopleScout, we had a really good year, from a sales perspective. We had $39 million in annualized wins, which is quite a bit more than we've seen, Mark, historically. If you look at our 3-year average, we had $11 million of wins in the prior 3 years, on average, annually and nearly 4x that in 2021. In terms of the types of RFPs that we're seeing, we're seeing a lot of first-time buyers, folks that haven't outsourced their recruiting before. And it usually takes one of two forms. One form is a big bank. So we had a very large retailer that we signed in Q3 and rolled out in Q4, that sign up for a multiyear contract, their first time, over 30,000 hires, on an annual basis, and that's off to a really good start. It was a very competitive bid. All of the major players in the industry were part of that one. We had a number of other ones that we had won as well. The second type of engagements that we're seeing, are smaller types, what we call recruiter on demand, where clients are saying, "I don't want to outsource all of my recruiting. But boy, we need help. And so we need some supplemental resources." And so we've won more deals of the small variety than we've ever won in the history of PeopleScout in 2021. So we're feeling really good about our win rate. We've tended to run north of 40%, in terms of win rates, when we go after a deal. And that's not inconsistent with what we saw in Q3 and Q4. So lots of first-time buyers, lots of clients that are also engaging in a smaller way, which is great for us because a lot of the engagements, oftentimes, start small, we prove ourselves out and then more and more of that in-house work goes in our direction. And that's our biggest competitor, Mark, is in-house, as you know. So that's who we view as the strongest competitors trying to displace an in-house team. And boy, it was a great year for PeopleScout for doing that in 2021.

There are no further questions at this time. I would like to turn the call back over to Patrick Beharelle.

Well, thanks, everyone, for joining the call today, and thanks to all of the TrueBlue associates for the great work that they did in 2021 and that they're doing in 2022. We look forward to speaking with you all again in 2022. We look forward to speaking with you all again on the Q1 earnings call in early May, and hope you all stay safe, and thank you for your time. I appreciate it.

This concludes today's conference call. Thank you for attending. You may now disconnect.